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The first glance at IMFs press release depicts that running tight fiscal and monetary policies is the order of the day. That is exactly why the GDP growth target under the programme is slashed by 80 basis points to 2.5 percent in FY14. This may help tame inflation a bit, but the rupee will slide even more against the greenback by the end of this year.
On the flipside, the Memorandum on Economic and Financial policies posted by the Ministry of Finance is exhibiting softer monetary stance to be adopted in the coming few months.
Yes, there is some contradiction in interpreting the two documents; and more clarity will be there after the IMF releases its country report in a few days and the central bank unveils its monetary policy on September 13. Nonetheless, there is no doubt that both parties are on board as regards having a contracting fiscal policy and to have a better inter-provincial fiscal discipline.
Plus, a generic road map has been charted out for the restructuring and privatisation of 65 public sector entities including giants PIA, Pakistan Steels and Pakistan Railways, whereas prior steps on doing away with power sector subsidies have already been taken (partially).
The fund approved an extended finance facility of $6.6 billion with equal quarter installments of $540 million each while the payback starts much later. This is by no way going to be a one-tranche programme that Pakistan is known for.
The fund has learned from past experiences and money is going to be released only upon the fulfillment of stipulated conditions. But, on the face of it, the conditions spelled out so far, especially on the monetary side, are softer and generic. At one point the fund talks about tightly managing currency market and put limits on monetary growth, and at the other, the Letter of Intent explicitly mentions having an accommodative monetary policy in FY14.
While on the fiscal side, targets are too ambitious and there is no clear strategy to achieve it. Fiscal consolidation aims to bring fiscal deficit from the baseline of 8.8 percent of GDP in FY13 to 3.5 percent in FY16. Some of the measures have already been introduced in the budget which will be complimented by a new gas levy to be introduced in December. The levy is expected to add 0.4 percent of GDP to the revenue on an annualised basis.
Then there are FBRs renewed efforts to enhance tax base by sending notices to ten thousand people and gaining access to information about bank accounts. But analysts doubt that these would suffice to achieve the targets. On the expenditure side, inter-disco tariff rationalisation will do the trick.
The more important is stipulation of timeline on restructuring and privatisation of PSEs. The reform strategy of 30 out of 65 PSEs is going to be approved by the CCI by the end of September, and to privatise PIA by June end. Only time will reveal whether these policies would be fruitful or would only catch dust in the shelves. In the power sector, finally a timeline is set on appointing an audit firm for all payables including power holding company and separation of CPPA from NTDC.
However, while the restructuring of power sector and fiscal consolidation may take place to some extent; there are grey areas on the independence of monetary policy and monetary targets. There is nothing yet clear on the quarterly NFA and NDA targets. At one place the memorandum talks about the formation and independence of monetary policy committee, while in the fiscal section the finance ministry is saying that there will be an accommodating monetary policy this year.
With the IMF programme in the pocket, the government is confident about getting programme loans from others now. And the IMF is explicit on it as well. That should give a relief to managers of PSDP and other government developmental funds.
On the external front, the central banks foreign reserves are expected to reach $18 billion (covering 3 months of imports) by the end of the funds programme.
The fund expects that by running prudent monetary and exchange rate policies under its umbrella will result in improving current account deficit by 100 bps to 0.6 percent of GDP by the end of this year. But then that has to be achieved by letting the rupee depreciate to 110 per USD by the end of the year, a phenomenon that some punters had been betting on for quite some time.

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